The Economy

The recession has exerted enormous pressure on both businesses and consumers. Businesses have struggled to obtain credit; consumers have tightened belts. Here we look at some of the consequences of the worst economic downturn in generations.

Public finances

One of the major problems facing the UK economy is the vast scale of public borrowing; money borrowed in order to bolster failing banks, to ensure the continuing lubrication of the wheels of the economy (through the Bank of England's quantitative easing programme) and to support public sector employment. Net Government borrowing is currently in excess of £850 billion or 60 per cent of GDP; the planned budget deficit for the year was £178 billion although the revised Budget forecasr is now £167 billion. It is a debt, however essential its role in the short term, that will have to be repaid through (1) increased taxation - some, the upcoming 1 per cent rise in national insurance contributions for example, aimed at businesses - and through (2) public spending cuts in the medium and long term. Those cuts may pare as much as 2 per cent off the GDP. A further option is (3) the sale of public assets.

Consumer spending

The Chancellor's decision to reduce the standard rate of VAT from 17.5 per cent to 15 per cent from 1 December 2008 to 31 December 2009 helped, but consumer spending on large items such as furniture and white goods plummeted. That measure of the vitality of the economy - sales of new cars - registered such dismal figures that the Chancellor also introduced the scrappage scheme: a £2,000 discount for those who traded in old cars for new ones. But spending habits showed a distinct change across the board. For example, cut-price supermarkets enjoyed a boom of 18 per cent in business.

Saving

The economics of a recession demand that people keep spending; the human perception of a recession demands that people stop spending and start saving, or at least start paying off debts. Such has been the case.
The number of households that are using their money to repay debts or to boost their savings is on the increase. Worries over prospects for the UK economy and the effects of the forthcoming rises in taxes have encouraged more people than ever to save rather than to spend, official figures suggest.
The level of earnings that is being saved in banks and building societies is at its highest for almost a decade. In the third quarter of 2009 consumers repaid £5 billion more than they borrowed, according to the Office for National Statistics (ONS).
While spending edged up by just 0.3 per cent in the same period, the gap between household income and the average amount that households spent rose to 8.6 per cent. Much of that money will have been used to repay debts or increase savings accounts.

Inflation

Those savers, though, have found themselves penalised by historically low official interest rates and by rising inflation.
According to the ONS, the Consumer Price Index for February stood at an annual rate of 3.0 per cent, down from 3.5 per cent in January.
As a result, inflation is set to have a knock-on, adverse effect on the level of returns that savings accounts deliver, at least in the short term. For basic rate taxpayers to gain a real return on their money, they will require an account that pays a minimum of 3.75 per cent interest. For higher rate taxpayers, that figure climbs to 5.0 per cent.
Taking the latest inflation rate and tax into consideration, the actual return on an average no notice savings account in January was 2.3 per cent.
In its latest quarterly inflation report, the Bank of England forecasted that inflation will hit a peak of 3.5 per cent in the near term but will then fall back to as low as 0.9 per cent as the economy struggles to expand.

Future growth

In the same report, the Bank of England chose to revise its predictions for the growth rates that the UK economy can look forward to. In its previous estimates, the Bank anticipated 4 per cent expansion by the second quarter of 2011. That has been revised down to 3.2 per cent. In the budget the Chancellor predicted that growth in 2010 would be 1 to 1.5 per cent and 3 to 3.5 per cent in 2011.

The dangers of recovery

If we are indeed crawling our way along the long and bumpy road to recovery, it may not be good news for a number of firms. The recessions of the 1980s and 1990s taught us that a return to growth in the economy also heralded the end for some businesses. Known as the insolvency lag, firms that have been getting by on the goodwill of lenders and the government suddenly discover that the leeway they had been granted is withdrawn.
Research by the Association of Business Recovery Professionals has revealed that, in the 1990s, the peak in corporate liquidations arrived a full five quarters following the first quarter of recovery. Why? Because it requires time for the recovery - increased orders and customer expenditure - to feed its way not just into the economy but also into the systems of individual businesses. And because creditors and government policymakers mistake the general signals of recovery for the health of individual businesses, and begin the process of reclaiming loans and cutting measures designed to support them.

Planning for recovery

Planning, for every business and individual, is important at the best of times; in our uncertain times, it is imperative. It is imperative because only with careful, intelligent planning can you or your business take advantage of the recovery - whatever its nature.
There are a number of areas where we can help you plan. These include: cash flow management; profit enhancement; capital expenditure; debt management; and investment portfolios. Please don't hesitate to contact us for expert, professional advice and guidance.